Though its revenue and profit both dropped by double-digit percentages, Microsoft Corp. walloped Wall Street expectations in its fiscal first quarter as the company struggled against the broader economy.

Revenue was $12.92 billion for the quarter ended Sept. 30, down 14 percent from $15.06 billion in the year-ago period. However, Microsoft deferred $1.47 billion in revenue from pre-orders and sales to computer makers of its new operating system, Windows 7, which was released Thursday.

If it had included those sales, Microsoft’s revenue would have decreased 4.5 percent year-over-year. The Redmond-based company said the deferral amounted to 12 cents per share, which would have resulted in an increase of 8 percent over a year ago.

“To put the financial results in perspective, Q1 represented the highest amount of Windows licenses ever sold in a quarter,” Bill Koefoed, Microsoft’s general manager of investor relations, said during a conference call with reporters and investors.

Profits were off 18 percent. Microsoft’s earnings dropped to $3.57 billion, or 40 cents per share  much higher than analysts’ estimate of 32 cents per share. In the same period last year, Microsoft earned $4.37 billion, or 48 cents per share.

The struggling Entertainment and Devices Division, whose products include Xbox 360 and Zune, posted an operating income of $312 million, shooting up 49 percent from the year-ago period. EDD’s bottom line was in the red the past two quarters.

“Consumers are excited about Windows and Xbox,” Koefoed told seattlepi.com in a phone interview. “It’s a double-whammy for investors. They love it. I have an e-mail inbox full of love letters from the Street.”

As of 9 a.m., Microsoft stock was up nearly 7 percent as Wall Street reacted to the relatively good news.

“It is showing stabilization,” Chris Liddell, Microsoft’s chief financial officer, said in the conference call. “The fourth quarter of 2009 may well have been the bottom of the economic reset.”

Friday’s results mark a potential turnaround for the software juggernaut.

Four of the software company’s five main divisions were in the black. Only the Online Services Division, which produces the Bing search engine, posted an operating loss  of $480 million. That dropped 33 percent from Q1 FY2009, when the division reported $321 million in operating loss.

Online advertising revenue was down 2 percent, about even with industry trends. Though the number of display ads Microsoft sold was up, lower prices canceled out any revenue increases, Koefoed said.

Microsoft’s Windows & Windows Live Division  newly renamed and reorganized from the old Client division — reported operating income of $1.46 billion, down a whopping 52 percent from Q1 FY2009. But deferred revenue from Windows 7 is likely to offset that figure in the company’s fiscal-year balance sheet.

Liddell said he expects steady enterprise growth for the next two years as businesses start adopting Windows 7. That process should start in the beginning of calendar 2010, he said.

“Anecdotal reaction is certainly good,” Liddell said of Windows 7. “All of the feedback that we get so far is positive, so that supports the view that we’ll start to see that” corporate adoption soon.

Demand for Windows 7 so far has been greatest among consumers and developing markets, Liddell said. Demand in Europe is “relatively weak” while demand in China is strong, he said.

Operating expenses were down 10 percent from a year ago, “which investors are clearly excited about,” Koefoed said. Most of those savings came from reduced head-count, after Microsoft executed its first-ever mass layoffs in the spring.

To adjust for economic influences, Microsoft decreased its forecast FY2010 budget by $400 million. Last year, Microsoft cut its budget by $500 million after announcing Q1 FY2009 earnings.

“I don’t see any internal force that is going to significantly increase (operating expenditures) in the next year,” Liddell said.

Unearned revenue, which sheds light on Microsoft’s progress signing enterprise contracts, was $1.2 billion, a 6 percent drop from a year ago. Koefoed said enterprise renewal was “at expectations.”

During the past year, PC sales worldwide have slipped along with the rest of the economy. Reduced spending plus the increasing popularity of cheaper netbooks have forced down income for software companies like Microsoft and computer manufacturers alike.

Microsoft, however, estimated the market grew 2 percent year-over year. Industry players hope Thursday’s launch of Windows 7 will help turn things around for the industry.

“What I think we’re seeing is the robustness of the concept of the PC,” Liddell said. “Even through tough economic times, we still see demand for the PC.”

During the first quarter, Microsoft released two major product updates, though not the company’s main money-makers. The Zune HD plus new Zune services launched in mid-September, and Windows Mobile 6.5 hit the market last month to less-than-enthused reviews.

Microsoft expects the upcoming release of Office 2010 and SharePoint 2010 will turn things around for the company’s Business Division, which reported a 10 percent drop in operating income from the year-ago period.

Koefoed said Microsoft is still pleased with the early performance of Bing, which has seen its search-engine market share increase  slightly  each month since its June launch. Microsoft expects its proposed revenue-sharing deal with Yahoo, which would have Bing power the Internet company’s search engine, to help turn things around for the Online Services Business.

The company still expects to spend $100 million to $200 million in one-time expenses to integrate its search product with Yahoo, Liddell said. That timing depends on how soon federal antitrust regulators approve the partnership  assuming they do.

“We think that the profit potential in our Online Services division is huge,” Koefoed told seattlepi.com. “It’s kind of like drilling for oil. It costs some money to drill, but once you hit oil there’s great profit.”